PUBLIC IMAGE PTY LTD v HENRI HOLDINGS (CIRCULAR QUAY) PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MEAGHER, HANDLEY and POWELL JJA 22 October 1993, 25 November 1993 [1993] NSWCA 217 FACTS: The appellants purchased from the respondents a business in Jindabyne consisting of a restaurant, craft shop, maze, animal farm and rental property. The sale was found to have been procured by fraudulent misrepresentations as to annual turnover and profits. His Honour in the court below awarded damages, to be determined by inquiry, to compensate for the difference between the price for which the business was purchased and its true value. Damages were not awarded for consequential losses which the appellants alleged they suffered in running the business. The appellants claimed an inquiry was unnecessary because the purchase price correctly reflected the damages caused by the representations, and sought additional consequential damages. The respondents claimed that, as the appellants had not proved the damages which were an element of their cause of action, the action should be dismissed. HELD: (1) The plaintiffs could have led evidence as to the true value of the business, but did not. This did not disentitle them to a remedy, given the finding of fraud, but did leave an inquiry as the only possible means of quantifying their loss. (2) The purchase price of the business was not the appropriate measure of the damages resulting from the fraudulent sale. The evidence clearly showed the value of the business was not nil. (3) Consequential damages need not be awarded in a case where some blame for the poor performance of the business lay with the appellants, and the facts point to the appellants having affirmed the contract. (4) Common law rescission is not available to the appellants, because they elected to sue instead for damages. Further, no error has been demonstrated in his Honour's exercise of discretion not to decree rescission under the Trade Practices Act, 1974. Trade Practices Act, 1974. Gould v Vaggelas (1985) 157 CLR 215. Meagher JA These are an appeal and a cross-appeal from a judgment of Windeyer J. They arose out of the sale of a business situate at Jindabyne, New South Wales. The appellants, in effect, were the purchasers, and the respondents and cross-appellants, in effect, the vendors. The vendors were the plaintiffs below, the purchasers the defendants. The vendors were successful in obtaining a verdict against the four individual appellants for debts arising under guarantees of the corporate appellant's liability for rent and mortgage payments. The purchasers were successful in persuading his Honour that the sale was procured by fraud, and was in breach of s52 of the Trade Practices Act 1974; and his Honour, finding that no precise sum of damage had been proved, ordered an inquiry before the Master to ascertain what, if any, damages the appellants had suffered. The appellants claim that a precise figure of the primary damages suffered was proved, that being the purchase price paid by the appellants; they also claim that his Honour was wrong not to order consequential damages. The 2 UNREPORTED JUDGMENTS respondents claim that since damages were an ingredient of the plaintiff's cause of action, failure to prove them should have entailed the consequence that the action be dismissed. The factual details must, of course, be recited with a little more detail before embarking on an analysis of the parties' rights. The business sold by the respondents to the appellants consisted of: (a) a restaurant called the Crackenback Cottage Restaurant, (b) a shop called the Craft Shop, (c) an outdoors enterprise called the Maze and Animal Farm, and (d) an old stone cottage from which rentals were derived. These businesses constituting the subject of sale to the purchasers were in fact only one-half of the complexes of business conducted by the vendors, who also conducted a ski lodge and a restaurant situate therein. The date of the sale was 28 February 1985. The documentation of the sale consisted of: (a) an agreement for sale of the restaurant business, the Craft Shop, the Maze and Animal Farm and the old stone cottage for $84,000. This figure was comprised of goodwill of $64,000 and plant and fittings of $20,000 - In addition, stock was to be taken over at its market value of $10,000; (b) an agreement for sub-lease of the property on which these activities were conducted. The sub-lessor was the corporate respondent, the sub-lessee the corporate appellant; (c) a bill of sale over the plant and equipment to secure $34,000 of the purchase price advanced by the vendors; and (d) personal guarantees of the rent and mortgage repayments from the four individual appellants. The vendor was the respondent Henri Holdings (Circular Quay) Pty Ltd, the purchaser Public Image Pty Ltd. The vendor was owned and directed by Mr and Mrs John Young. Mr John Young was the head-lessor of the lease to the vendor company. He was also the person principally responsible for making the fraudulent representations. The four individual appellants were Messrs. Ian Harvey, Anthony Anderson, Brent Dallow and Richard Ashmore. They were the guarantors I have mentioned. They were also persons interested in the appellant company Public Image Pty Ltd. A number of representations were charged against the vendor respondents. The two which were found to have been made by the Vendors were as follows: (a) the turnover of the business at the date of sale was approximately $250,000 per annum; (b) at the same date, the profit yielded by the business averaged about $1000 per week. His Honour's findings that these representations were made is not challenged in the present proceedings. The appellants took over the business (or, perhaps I should say, "businesses'') sold and very soon discovered that in their hands both turnover and profit were much less than $250,000 p.a. and an average of $1,000 per week. The appellant's solicitors were not slow to point this out in correspondence directed to the respondents. The purchasers made loss after loss and eventually went out of possession. Some subsequent purchaser has leased the restaurant, which at the date of trial was being run successfully at a higher rent. WRIBLIC IMAGE PTY LTD v HENRI HOLDINGS (CIRCULAR QUAY) PTY LTD (Meaghe JA) There are a number of features to be noted about the fraudulent representations in the present case. First, whilst fraud there was, it was not a wholesale fraud. It was not as if there was no turnover at the restaurant. If one looks at the representation concerning turnover, for example: it was that immediately before the date of sale the annual turnover was $250,000. According to the corporate appellant's accounts relating to its first full year of business (the year ending 30 June 1986), despite its teething problems, turnover was $183,689.00. This is a factor to be borne in mind in relation to the submission - to which I shall come - that at the date of sale the business was of no value. The second feature which it is necessary to bear steadily in mind is that the turnover and _ profit representations were precisely that - representations as to the present and immediately past; they were not warranties. The third feature which requires comment is that it is impossible on the evidence to conclude what the real turnover was, and what the real profits of the business were, in the hands of the vendors: this is partly because, insofar as business records were kept, they related to the totality of the vendor's business not merely the business sold to the appellant company; and partly to the fact that such records as were kept are wholly unreliable and in many respects admittedly false - for example, moneys received were frequently not recorded, and non-business expenditure was often recorded as if it were business expenditure. Fourthly, the evidence does not permit one to conclude with much confidence to what extent the failure of the business in the appellants' hands was due to the inexperience and poor performance of the appellants and their employees, nor does his Honour make any specific finding on this aspect of the case. The uncontradicted evidence seems to be that the restaurant was well patronised when in the respondent vendor's hands, and hence, one would presume, fairly prosperous; after the appellants left and the vendors resold it, his Honour does find it became prosperous, well-patronised and profitable. In the appellants' hands it was not profitable. It is hard not to draw the inference that they must have been deficient in entrepreneurial and managerial skills. This melancholy conclusion is reinforced by the evidence: none of the four individual appellants had ever run such a business before although the fourth appellant was a chef; the appellant Harvey said that the business was not run satisfactorily when in the appellants' hands and there was considerable friction amongst the appellants. Fifthly, in order to ascertain what the net profit of the business was one would, in the case of the appellants, have to make a number of deductions which the vendors would not. These include (a) rent, (b) cost of borrowings secured by Bill of Sale, (c) cost of repaying other moneys advanced to finance purchase, and (d) wages of the four individuals concerned. Item (a) amounted to a minimum of $45,000 per annum; item (b) amounted to $10,200 per annum; item (c) amounted to $21,600 per annum. Sixthly, and consequently, even if they had made a profit of $1,000 a week (the figure represented by the respondents), which is $52,000 per annum, the addition of the extra items just mentioned would have converted that profit into an annual loss of at least $26,000. His Honour held that the appellant purchaser was entitled by way of damages to a sum equal to the difference between the purchase price paid for the business and its true value at the same date, neither side - obviously enough - challenging the correctness of that proposition. However, there was a difficulty in applying that simple formula, namely that the purchaser had not led any evidence at all as to its true value at the date of purchase, March 1985. This is truly remarkable, as the purchaser had called an expert witness in business valuations to give evidence 4 UNREPORTED JUDGMENTS on a variety of matters. He was obviously qualified to give an opinion as to the value of the business at the date of purchase, but he was not asked to do so - at least, not until he was giving evidence in re-examination, when it was too late. No attempt was made to re-open the case and recall him. There was no need for his Honour to resort to guesswork and speculation where he was so painfully aware that accurate evidence was available. As a consequence his Honour made an order that the Master ascertain and quantify the damages suffered by the purchaser, by subtracting the value of the business at March 1985 from the purchase price. It is difficult to see what other course was open to him. Nonetheless, his order has evoked protest from both camps. The vendor's somewhat unmeritorious protest was that since the purchaser had failed to prove any damage its cause ought to have been dismissed with costs, but I do not think we should accede to this request. Why did the vendor make the fraudulent representation in question unless it were to the financial benefit of itself and the detriment of the purchaser? For the purchaser, Mr Wheelhouse, whilst conceding that he had failed to provide the vital direct evidence which was available to him nonetheless argued that there were sufficient facts which were found by his Honour and which were unchallenged which would oblige this Court to conclude that the value of the business was nil at March 1985. In this regard much was made of the evidence of the expert, a Mr Cooper, that the business could not be resold unless the turnover increased to $7,000- But that was said in the context of the possibility of a sale at $80,000. In other words, the expert was saying - and as at 1987 - that it would be impossible to sell the business at $80,000, unless there were a weekly turnover of $7,000. Indeed, the same witness said of the business in 1987 that it was worth about $40,000. The fixtures fittings and plant alone were worth about $20,000. The restaurant was said by one witness to be "obviously full and very busy" when run by the vendors; and his Honour found that at the date of the hearing before him it was being run successfully at a higher rent than that contained in the purchaser's lease. In these circumstances it is, I think, clear that at all times it had some value. Nor can it be said, as the purchaser's counsel said repeatedly, that the business was inherently "not viable". Nor, for similar reasons, can it be said that the cause of the losses suffered by the purchaser was inherent in the business itself. His Honour declined to grant any damages for consequential loss and this is the next subject of appeal. The purchaser had sought to recover all losses made by it in the course of running the business as consequential damages, although it is not quite clear what these losses are. His Honour said: "I do not think the evidence identifies any consequential damages flowing directly from the inducement." It is clear that consequential losses, if proved, may be awarded in a case such as this: Gould v Vaggelas (1985) 157 CLR 215, particularly per Gibbs CJ at 222. It is evident that a substantial part of the losses actually made must be attributable to the additional expenses which the purchaser had incurred by way of rent and the other factors I have identified. It also seems likely that at least part of the loss is attributable to the "folly, error or misfortune" of the purchaser itself (to quote the Chief Justice), this being partly due to their mis-management of the restaurant and partly due to their continual affirmation of the contract of sale. As soon as the appellants took possession of the business it became apparent that the turnover was not as high as expected, and that profits were lower than expected. The appellants sought legal advice and acrimonious correspondence between the parties followed. This culminated in the "Variation Agreement" of WRIBLIC IMAGE PTY LTD v HENRI HOLDINGS (CIRCULAR QUAY) PTY LTD (Powell JAB 30 May 1986 which affirmed the appellants' obligations but in a slightly altered from. The appellants having again fallen into default in their obligations, on 1 June 1987, the vendor commenced proceedings for possession, which were settled on the ground that further payments were to be made by the appellants to the respondents. The appellants knew by December 1985 at least what the turnover figures were and what the profits were. Their legal advisers, one must assume, told them what their legal rights were. In these circumstances it is difficult to see why the agreements of 30 May 1986 and | June 1987 cannot be regarded in law as affirmations. However, in my view, it is not strictly necessary to answer this question. A question of whether Windeyer J should have ordered rescission of the original agreements was debated before us, as was the cognate question whether we should proceed on the basis that those agreements were nullities. I cannot see any error in his Honour's treatment of this subject. As far as rescission is concerned, no such relief would be available at common law in an action for deceit because, even if the agreements of 30 May 1986 and | June 1987 do not amount to affirmations, the fact that the appellants finally elected to sue for damages and not rescission itself terminates all rights to the latter remedy. As far as rights under the Trade Practices Act, 1974 are concerned, it is theoretically possible for a Court in its discretion to decree rescission even though any general legal right to that remedy has evaporated; but his Honour exercised his discretion not to take this course, and no error - much less clear error - has been demonstrated in his decision. Absent rescission, his only other basis for treating the agreements as, in effect, nullities, would be that the business sold under the agreements was of no value whatever, a proposition which can be demonstrated to be untenable. For these reasons, I would dismiss this appeal with costs. I would also dismiss the cross-appeal with costs. Handley JA I agree with Meagher JA. Powell JA I agree with Meagher JA. Appeal and cross-appeal dismissed with costs. Counsel for the Appellant: S Wheelhouse Instructed by: MC Griffith and Co Counsel for the Respondent: P Neil Instructed by: Lane and Lane